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Capitalization De Minimis Rule

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    Capitalization De Minimis Rule

    In addition, the IRS and the Treasury Department received several comments requesting that the definition of materials and supplies raise the specified acquisition or production cost threshold from $100 or less to $500 or less and that this specified amount be indexed for inflation. The temporary regulations retain the $100 limitation to avoid possible inappropriate distortions of a taxpayer's income.

    ...

    The new criteria mandates that the aggregate of amounts paid and not capitalized under the de minimis rule for the taxable year must be less than or equal to the greater of (1) 0.1 percent of the taxpayer's gross receipts for the taxable year as determined for Federal income tax purposes; or (2) 2.0 percent of the taxpayer's total depreciation and amortization expense for the taxable year as determined in its AFS. Proposed Treasury Regulation 263(a)
    Just received an email today that the Department of Treasury and the IRS have posted an updated proposed Treasury Regulation 263(a). It looks like the regulation maintains the de minimis threshold as $100 but adds another test for a business to establish a higher de minimis threshold based on their gross revenue or total deperciable expense for the current tax year.
    Michael

    #2
    Option 2

    Can anyone give me an example of option 2?

    Comment


      #3
      X is a member of a consolidated group for federal income tax purposes. X's financial results are reported on the consolidated applicable financial statements for the affiliated group. X's affiliated group has a written policy at the beginning of Year 1, which is followed by X, to expense amounts paid for property costing less than $500. In Year 1, X pays $160,000 to purchase 400 computers at $400 each. Assume that each computer is a unit of property under § 1.263(a)-3T(e), is not a material or supply under § 1.162-3T, and that X intends to treat the cost of only the computers as de minimis under paragraph (g)(1) of this section. X treats the amounts paid for the computers as an expense on the applicable financial statements for the affiliated group. For its Year 1 taxable year, X has gross receipts of $125,000,000 for Federal tax purposes and reports $7,000,000 of it's own depreciation and amortization expense on the affiliated group's applicable financial statement. Thus, in order to meet the criteria of paragraph (g)(1)(iv) of this section for Year 1, the total aggregate amounts paid and not capitalized by X under paragraphs (g)(1)(i), (ii), and (iii) of this section must be less than or equal to the greater of $125,000 (0.1 percent of X's total gross receipts of $125,000,000) or $140,000 (2 percent of X's total deprecation and amortization of $7,000,000). Because X pays $160,000 for the computers and this amount exceeds $140,000, the greater of the two limitations provided in paragraph (g)(1)(iv) of this section, X may not apply the de minimis rule under paragraph (g)(1) of this section to the total amounts paid for the 400 computers.
      From: Example 2. De Minimis Rule Not Met
      Michael

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